Question 1

In most countries FIs report their balance sheet using market value accounting.

Accepted Answer

A) True 
 B)False

Question 2

A bond is scheduled to mature in five years.Its coupon rate is 9 percent with interest paid annually.This $1,000 par value bond carries a yield to maturity of 10 percent.Calculate the percentage change in this bond's price if interest rates on comparable risk securities increase to 11 percent.Use the duration valuation equation.

Accepted Answer

A) +4.25 percent 
B) -4.25 percent 
C) +8.58 percent 
D) -3.93 percent 
E) -3.84 percent 
A) +4.25 percent 
B) -4.25 percent 
C) +8.58 percent 
D) -3.93 percent 
E) -3.84 percent

Question 3

The duration of a portfolio of assets can be found by calculating the book value weighted average of the durations of the individual assets.

Accepted Answer

A) True 
 B)False

Question 4

U.S. Treasury quotes from the WSJ on Oct. 15, 2003:   
-If yields increase by 10 basis points,what is the approximate price change on the $100,000 Treasury note? Use the duration approximation relationship.

Accepted Answer

A) +$179.39 
B) +$16.05 
C) -$1,605.05 
D) -$16.05 
A) +$179.39 
B) +$16.05 
C) -$1,605.05 
D) -$16.05

Question 5

First Duration Bank has the following assets and liabilities on its balance sheet:  
-What is the FI's leverage-adjusted duration gap?

Accepted Answer

A) 0.91 years. 
B) 0.83 years. 
C) 0.73 years. 
D) 0.50 years. 
A) 0.91 years. 
B) 0.83 years. 
C) 0.73 years. 
D) 0.50 years.

Question 6

Duration of a fixed-rate coupon bond will always be greater than one-half of the maturity.

Accepted Answer

A) True 
 B)False

Question 7

Marking-to-market accounting is a market value accounting method that reflects the purchase prices of assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 8

The immunization of a portfolio against interest rate risk means that the portfolio will neither gain nor lose value when interest rates change.

Accepted Answer

A) True 
 B)False

Question 9

A bond is scheduled to mature in five years.Its coupon rate is 9 percent with interest paid annually.This $1,000 par value bond carries a yield to maturity of 10 percent.What is the duration of the bond?

Accepted Answer

A) 4.677 years. 
B) 5.000 years. 
C) 4.674 years. 
D) 4.328 years. 
E) 4.223 years. 
A) 4.677 years. 
B) 5.000 years. 
C) 4.674 years. 
D) 4.328 years. 
E) 4.223 years.

Question 10

An FI purchases a $9.982 million pool of commercial loans at par.The loans have an interest rate of 8 percent,a maturity of five years,and annual payments of principal and interest that will exactly amortize the loan at maturity.What is the duration of this asset?

Accepted Answer

A) 4.12 years. 
B) 3.07 years. 
C) 2.50 years. 
D) 2.85 years. 
A) 4.12 years. 
B) 3.07 years. 
C) 2.50 years. 
D) 2.85 years.

Question 11

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year.   
-What is the leverage-adjusted duration gap?

Accepted Answer

A) 0.605 years. 
B) 0.956 years. 
C) 0.360 years. 
D) 0.436 years. 
A) 0.605 years. 
B) 0.956 years. 
C) 0.360 years. 
D) 0.436 years.

Question 12

Duration is equal to maturity when at least some of the cash flows are received upon maturity of the asset.

Accepted Answer

A) True 
 B)False

Question 13

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually.  
-What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years?

Accepted Answer

A) The risk that interest rates will rise since the FI must purchase a 2-year CD in one year. 
B) The risk that interest rates will rise since the FI must sell a 1-year CD in one year. 
C) The risk that interest rates will fall since the FI must sell a 2-year loan in one year. 
D) The risk that interest rates will fall since the FI must buy a 1-year loan in one year. 
A) The risk that interest rates will rise since the FI must purchase a 2-year CD in one year. 
B) The risk that interest rates will rise since the FI must sell a 1-year CD in one year. 
C) The risk that interest rates will fall since the FI must sell a 2-year loan in one year. 
D) The risk that interest rates will fall since the FI must buy a 1-year loan in one year.

Question 14

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year.   
-What is the duration of the liabilities?

Accepted Answer

A) 0.708 years. 
B) 0.354 years. 
C) 0.350 years. 
D) 0.955 years. 
A) 0.708 years. 
B) 0.354 years. 
C) 0.350 years. 
D) 0.955 years.

Question 15

The shortcomings of this strategy are the following except

Accepted Answer

A) duration changes as the time to maturity changes,making it difficult to maintain a continuous hedge. 
B) estimation of duration is difficult for some accounts such as demand deposits and passbook savings account. 
C) it ignores convexity which can be distorting for large changes in interest rates. 
D) it is difficult to compute market values for many assets and liabilities. 
E) it does not assume a flat term structure,so its estimation is imprecise. 
A) duration changes as the time to maturity changes,making it difficult to maintain a continuous hedge. 
B) estimation of duration is difficult for some accounts such as demand deposits and passbook savings account. 
C) it ignores convexity which can be distorting for large changes in interest rates. 
D) it is difficult to compute market values for many assets and liabilities. 
E) it does not assume a flat term structure,so its estimation is imprecise.

Question 16

The numbers provided are in millions of dollars and reflect market values:  
-What is the weighted average duration of the assets of the FI?

Accepted Answer

A) 7.25 years. 
B) 7.75 years. 
C) 8.25 years. 
D) 8.75 years. 
A) 7.25 years. 
B) 7.75 years. 
C) 8.25 years. 
D) 8.75 years.

Question 17

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually.  
-What is the duration of the two-year loan (per $100 face value)if it is selling at par?

Accepted Answer

A) 2.00 years 
B) 1.92 years 
C) 1.96 years 
D) 1.00 year 
A) 2.00 years 
B) 1.92 years 
C) 1.96 years 
D) 1.00 year

Question 18

Immunizing the net worth ratio requires that the duration of the assets be set equal to the duration of the liabilities.

Accepted Answer

A) True 
 B)False

Question 19

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year.   
-What is the duration of the assets?

Accepted Answer

A) 0.708 years. 
B) 0.354 years. 
C) 0.350 years. 
D) 0.955 years. 
A) 0.708 years. 
B) 0.354 years. 
C) 0.350 years. 
D) 0.955 years.

Question 20

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually.  
-Use the duration model to approximate the change in the market value (per $100 face value)of two-year loans if interest rates increase by 100 basis points.

Accepted Answer

A) -$1.756 
B) -$1.775 
C) +$98.24 
D) -$1.000 
A) -$1.756 
B) -$1.775 
C) +$98.24 
D) -$1.000

Exam 9: Interest Rate Risk II

In most countries FIs report their balance sheet using market value accounting.

The duration of a portfolio of assets can be found by calculating the book value weighted average of the durations of the individual assets.

U.S. Treasury quotes from the WSJ on Oct. 15, 2003: -If yields increase by 10 basis points,what is the approximate price change on the $100,000 Treasury note? Use the duration approximation relationship.

First Duration Bank has the following assets and liabilities on its balance sheet: -What is the FI's leverage-adjusted duration gap?

Duration of a fixed-rate coupon bond will always be greater than one-half of the maturity.

Marking-to-market accounting is a market value accounting method that reflects the purchase prices of assets and liabilities.

The immunization of a portfolio against interest rate risk means that the portfolio will neither gain nor lose value when interest rates change.

A bond is scheduled to mature in five years.Its coupon rate is 9 percent with interest paid annually.This $1,000 par value bond carries a yield to maturity of 10 percent.What is the duration of the bond?

An FI purchases a $9.982 million pool of commercial loans at par.The loans have an interest rate of 8 percent,a maturity of five years,and annual payments of principal and interest that will exactly amortize the loan at maturity.What is the duration of this asset?

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. -What is the leverage-adjusted duration gap?

Duration is equal to maturity when at least some of the cash flows are received upon maturity of the asset.

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. -What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years?

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. -What is the duration of the liabilities?

The shortcomings of this strategy are the following except

The numbers provided are in millions of dollars and reflect market values: -What is the weighted average duration of the assets of the FI?

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. -What is the duration of the two-year loan (per $100 face value)if it is selling at par?

Immunizing the net worth ratio requires that the duration of the assets be set equal to the duration of the liabilities.

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. -What is the duration of the assets?

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters